What is triskaidekaphobia? It's the fear of the number 13. However, as we start the thirteenth year of this century, investors have chosen to completely disregard any superstitious forebodings they may have and are driving the price of assets higher. The FTSE 100, for example, hit a new four-and-a-half year high on 9 January as the index breached the 6,100 level. It's since had the best start to a trading year in more than two decades with a rise of over 5 per cent in the first 3 weeks - compare this to a gain of only 5.8 per cent during the whole of 2012. The UK stock market is not alone, as we've also seen strong surges in equity markets across the world. The S&P 500 in the US has climbed by a similar amount, and the general rule from previous years is that if the US market has risen overall after the first five trading days of the year, it tends to finish the year with a gain - 14 per cent on average.
So, if anything, we seem to have had a lucky start to 2013. But important questions remain. Why have markets been so bullish so far in 2013 and will the positive sentiment drive the price of assets even higher? I see three important forces driving the upside.
Eurozone debt crisis
The primary positive driving force is a growing sense that the worst of the eurozone debt crisis is now behind us. The eurozone makes up 20 per cent of the entire globe's economy, and the substantial risk of this region going through exceptional economic turmoil, or even breaking up, has been the single biggest factor holding back the global economic recovery for the last three years.
But the eurozone has been working through a highly complex process of political and economic reform to put it back on the path to prosperity, and after three years of austerity we may be beginning see the light at the end of this still very long tunnel. Government borrowing costs for Italy are now back down to levels not seen since the start of 2010. Spanish borrowing costs have also dropped sharply as the ECB has promised to provide a sovereign bailout should it be required, which has led the phenomenally depressed Spanish equity market to leap 45 per cent since the lows of summer 2012.
There is a substantial amount of work to do before peripheral Europe can get back to economic growth, but the important point is that the nightmare scenario of a full-blown eurozone break-up has, in my opinion, now been removed, and it feels like the handbrake has suddenly been taken off the global economy - and there's been a corresponding effect on the markets.
US fiscal policy
It's not all plain sailing ahead, though, as the second reason for such a bullish start to 2013 also happens to be one of the key market risks in the near term. I refer to the US "fiscal cliff". Or in other words, the political deadlock in Washington, where the Democrats and Republicans still can't decide on a mutually palatable plan for tackling the US's long term debt and deficit problems. The US fiscal position is now approaching emergency status, with the deficit more than double the size of the eurozone's deficit.
At 2am on 1 January, the US Senate voted through legislation that postponed a decision on spending cuts until February. Even though it was a complete cop-out, it was enough for now to avoid a fall off the cliff. Investors were greatly relieved as it ensured the US would not return to recession, and equity markets rebounded on the 2 January with the S&P 500 spiking 2.5 per cent higher in its biggest up day for 18 months. But the job is still only half done, and as the US approaches its debt ceiling in mid-to late end of February, the US political risk will again begin to escalate and have a negative influence on financial markets.
China is the world's second biggest economy, even though it's still considered to be an "emerging" or "developing" one. Therefore, China's economic health is increasingly important for the balance of the global economy. But China has endured a decline in its growth rate for the last three years with seven consecutive quarters of declining GDP.
Wage growth within China is leading to an expansion of its middle class and therefore an increase in internal consumption. However, China's economy still needs demand from the rest of the world's markets to fuel its growth and therefore the challenging economic climate in the developed world, especially the eurozone, has led to this consistent decline in its growth since 2010.
But as we enter 2013, the signals are that China has turned the corner. China announced its GDP growth figure for the fourth quarter of 2012 on 18 January 2013, a phenomenally important piece of information that the world's investors were biting their fingernails over. It came in at 7.9 per cent, confirming that their growth rate has begun its recovery. This figure justifies the large rally we've seen in global stocks in recent weeks, but may not have the power to continue to drive markets higher from here while the US fiscal position remains uncertain. I believe we would need to see Chinese GDP growth above 8 per cent to generate enough additional domestic buying power to ensure the rally that began back in mid-November continues.
Overall, the global economy starts 2013 in much better shape than it has been in since the collapse of Lehman Brothers back in September 2008. But market valuations already reflect this fact with lead indices hitting four and five year highs. So the key question from here is: can the rally continue? I believe that equities are beginning to look overbought, and I would expect a negative correction of around 5 per cent between now and March.
The US fiscal issues will return to undermine confidence, as will the rising issue of currency wars, and naturally this may lead to some profit-taking. However, I feel that the second half of 2013 will see the US fiscal picture being dealt with and the emergence of a global economy that can shrug off its five-year confidence crisis and return to "normal" growth rates, which should result in the S&P 500, for example, making a new all-time high by breaching its 2007 peak of 1,576. One thing is for sure: economic developments will continue to be hugely significant to traders.